Traders Clicked Ignore on Zynga’s IPO Request

Zynga, the software developer behind the popular facebook apps Farmville, Cityville and Zynga Poker, launched its initial public offering (IPO) this week to a surprisingly tepid response. Generally speaking, IPOs are engineered to automatically garner a jump in the value of the stock. Zynga, on the other hand, managed to loose 5% in one day. On the flip side, the IPO did rake in $1 billion for the company.

Despite the current situation of the U.S. economy, Zynga’s poor showing still needs explanation. Zynga is a growing, profitable company, yet, while looking at other IPOs like Jive Software, Groupon, and Pandora who all had respectable showings, it becomes clear that it’s not an issue with tech stocks. That could be, though, precisely the issue. Some analysts view Zynga not as a tech company, but rather as an entertainment company. The difference being that while with a tech company you can expect a certain degree of product longevity, entertainment material is inherently passing. There is no guarantee that Zynga will continue to pop out games that will fascinate facebook users. Casino reviews spoke lukewarmly of Zynga’s no-money poker. Zynga has a long way to go to become a top online casino.

Another issue with Zynga is their business model. The vast majority of Zynga’s profits come from the virtual products they sell within their games. Industry experts are unsure about how long users will remain loyal to or interested in these virtual products. Furthermore, according to Zynga’s own statistics, a minority of players constitute the majority of the sales. It remains to be seen if Zynga’s casino games will use real money.

Lastly, Zynga is overly dependent on a platform it has no control over. Facebook changes frequently and some of these changes are bad for Zynga games. That level of uncertainty distances investors.